At 19.55 hours on 16 March 1942 the unescorted, unarmed and zigzagging Australia (Master Martin Ader) was spotted by U-332 off the Diamond Shoals Light Buoy and within sight of William J. Salman and several other ships. Lighting in the distance outlined the ship against the sky, making the tanker a better target. A torpedo struck the starboard side in the engine room about 12 feet below the waterline. The explosion sent flames and smoke through the engine room skylights, destroyed the engine room fuel lines and auxiliary pipes and killed the officer and three men on watch below. Water flooded in the compartment, extinguishing the blaze as the tanker settled quickly by the stern. The surviving seven officers and 29 men abandoned ship in three lifeboats. William J. Salman picked them up within one hour and 35 minutes and delivered them to the armed yacht USS Ruby (PY 21). On 17 March, they were landed at Southport, North Carolina.

The stern of the Australia rested on the bottom on an even keel and was submerged with only her masts visible but all her cargo tanks intact. The total loss committee of the US War Shipping Administration (WSA) sent a notice to the Texas Company that they could collect insurance for total loss by sinking the vessel and she was sunk on 20 March. The wreck was broken up in August 1954.